June 6, 2022
State and Local Tax Weekly for May 25
Ernst & Young's State and Local Tax Weekly newsletter for May 25 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation.
Colorado makes elective pass-through entity tax retroactive to 2018
On May 16, 2022, Colorado Governor Jared Polis signed 2022 CO SB 22-124, which makes Colorado's elective pass-through entity (PTE) tax (enacted in 2021 by the SALT Parity Act1) retroactive to Jan. 1, 2018. 2022 CO SB 22-124 makes other changes to the Colorado PTE tax law as well as the resident credit for taxes paid to other states under the Colorado personal income tax law.
Retroactive application of SALT Parity Act: The SALT Parity Act is intended to enable most owners of PTEs2 doing business in Colorado to deduct, for federal income tax purposes, state and local taxes exceeding the annual federal $10,000 deduction limitation ($5,000 for married individuals filing separately) imposed by IRC §164(b)(6) (the SALT deduction limitation), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690). As originally enacted, the Colorado PTE tax election was available for tax years beginning on or after Jan. 1, 2022.
2022 CO SB 22-124 amends the SALT Parity Act to allow PTEs and their owners to retroactively make the election. For tax years beginning on or after Jan. 1, 2018, but before Jan. 1, 2022, a PTE can make the election by filing an amended composite tax return on or after Sept. 1, 2023, but before July 1, 2024, for the applicable years. The Colorado Department of Revenue (CO DOR) will issue the returns necessary to make the retroactive election(s). The procedure for making the election for tax year 2022 and thereafter is unchanged by 2022 CO SB 22-124 (i.e., a PTE tax election must be made on the return filed by the electing PTE and is binding on all the electing PTE's owners).
SB 22-124 specifies that the CO DOR will not assess any late-filing interest or penalty for filing amended composite returns made in connection with the filing of a PTE tax election. The CO DOR will have one year from the date the composite amended return is filed to make proposed adjustments but will not have to pay interest to the PTE or its owners on any refunds. The CO DOR must make any assessments within one year after a final determination is issued under Colo. Rev. Stat. 39-22-103(8). These final determinations may be enforced at any time within six years of the date of the determination.
Imposition of tax, electing PTE tax computation and electing PTE owner credits: 2022 CO SB 22-124 amends Colo. Rev. Stat. 39-22-344 by substituting the corporate tax rate for the income tax year for which the election is made for a fixed rate set in the original statute for purposes of computing the PTE tax liability for any such year.
As originally enacted, the SALT Parity Act imposed the elective PTE tax on an electing PTE based on its owners' distributive shares of Colorado-sourced income and income attributed to other states. The owners of an electing PTE could then exclude their share of the PTE's taxed income from their own Colorado income tax base to determine their own tax liability. The electing PTE, not its owners, could claim credits for taxes that were paid to other states and attributable to the electing PTE's activities in those states.
2022 CO SB 22-124 converts the income exclusion into a refundable tax credit available to the PTE owners. Specifically, 2022 CO SB 22-134 enacts new Colo. Rev. Stat. 39-22-347, which expressly states that the Colorado legislature's replacement of the income exclusion with the tax credit is intended to be revenue neutral and is intended to avoid double taxation on electing PTE owners.
For tax years beginning on or after Jan. 1, 2018, new Colo. Rev. Stat. 39-22-348(2) allows electing PTE owners to claim a credit against the Colorado individual income tax liability equal to their respective pro rata share of the tax paid by the electing PTE on their pro rata share of its income. Electing PTEs will need to provide sufficient information on their return to identify the owners entitled to the credits. Credits exceeding the electing PTE owner's Colorado income tax liability will be refunded to the PTE owner.
2022 CO SB 22-124 also amends Colo. Rev. Stat. 39-22-346 to require electing PTE owners to compute their resident credit, allowed under Colo. Rev. Stat. 39-22-108, without regard to the credit allowed by Colo. Rev. Stat. 39-22-347 (i.e., the credit for an electing PTE owner, described previously).
Changes to Colorado resident credit for non-electing PTE owners: Colo. Rev. Stat. 39-22-108 allows Colorado residents to claim a credit for taxes paid to other states. Unclear since enactment of the original PTE tax legislation was whether a Colorado resident investor in a PTE that did not make the Colorado PTE election could claim a resident credit for taxes paid by a PTE electing into a "SALT deduction cap workaround" regime in another state. 2022 CO SB 22-124 adds new Colo. Rev. Stat. 39-22-202(4), which deems a Colorado partner to have paid tax, for purposes of the resident credit, equal to its pro rata share of income tax paid by the partnership to "a state that does not measure the income of partners of a partnership by reference to the income of the partnership." This change seems intended to allow a Colorado resident to claim a credit for taxes paid by a PTE electing a "SALT deduction cap workaround" in another state.
For additional information on this development, see Tax Alert 2022-0892.
Arizona: New law (2022 AZ SB 1579) makes various changes to the state's elective pass-through entity (PTE) tax law. The calculation of taxable income of a partnership or S corporation electing to pay the PTE tax, is modified to provide that the taxable income of an S corporation is the total of all distributive income passed through to its shareholders under Ariz. Stat. § 43-1126(B) (i.e., corporate income tax imposed on an electing small business corporation). (A partnership's taxable income continues to be determined under Chapter 14 "Partnerships" of Title 43 "Taxation of Income" or the Arizona Revised Statutes.) The law also provides that the PTE election does not apply to partners or shareholders who are individuals, estates or trusts and who opt out of the election; the law removes language that exclude such partners or shareholders who "waive the right to opt out" of the PTE election. The law allows a credit against income tax (i.e., tax imposed by Title 43 of Ariz. Rev. Stat.) for a taxpayer who is a partner or a shareholder in a partnership or an S corporation that elects to pay the PTE tax, effective for tax years beginning from and after Dec. 31, 2021. The credit equals the portion of the PTE tax paid by the electing entity that is attributable to the partner's or shareholder's share of Arizona taxable income. An estate or trust and its noncorporate beneficiaries must apportion the credit in the same proportion as their respective share of federal distributed net income of the estate or trust from the electing entity; noncorporate beneficiaries must treat their share of the credit as a credit for entity-level income tax under Ariz. Rev. Stat. §43-1077. Excess credit can be carried forward for up to five years. Ariz. Laws 2022, ch. 235 (2022 AZ SB 1579), signed by the governor on May 20, 2022.
Louisiana: The Louisiana Department of Revenue (LA DOR) issued guidance describing federal and state changes to the net operating loss (NOL) deductions for corporations and individuals. For corporate income tax purposes, Louisiana does not follow the federal income tax treatment of corporate NOLs. Thus, changes to federal NOLs made by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136) do not apply to state corporation income tax returns. Thus, corporate taxpayers that carry back an NOL on a federal return may need to make adjustments to their Louisiana income and NOLs on their state returns as described in the guidance. For Louisiana individual income tax purposes, the guidance states that Louisiana "piggybacks" on the federal income tax treatment of NOLs. Louisiana individual income taxpayers who amend their federal returns to carry back an NOL also will need to amend their relevant state income tax return. Under Louisiana law, if a taxpayer's refund claim is attributable to an election to carryback an NOL, the refund claim prescribes three years from December 31 of the year in which tax for the loss year would become due instead of the generally three-year prescriptive period. If a federal NOL carryback under the CARES Act provisions is allowed on a federal return to a prescribed period for Louisiana income tax purposes, taxpayers have three years from December 31 of the year in which the tax for the loss year to amend their respective state return and claim a refund. The guidance includes an illustrative individual income tax example. La. Dept. of Rev., Revenue Info. Bulletin No. 22-011 "Federal and State Changes to Deductions for Net Operating Losses" (May 17, 2022).
South Carolina: New law (2022 SC HB 5057) updates the date of conformity of the South Carolina income tax law to the Internal Revenue Code (IRC) to Dec. 31, 2021 (from Dec. 31, 2020). If IRC sections adopted by South Carolina expired (in full or in part) on Dec. 31, 2021, are extended (but not amended) by federal enactment during 2022, they also will be extended for South Carolina income tax purposes in the same manner as extended for federal income tax purposes. For tax year 2021, South Carolina adopts the federal income exclusions for targeted Economic Injury Disaster Loan Advances and restaurant revitalization grant amounts. 2022 SC HB 5057 took effect May 16, 2022. S.C. Laws 2022, Act 201 (2022 SC HB 5057), signed by the governor on May 16, 2022.
SALES & USE
Colorado: The Colorado Department of Revenue (CO DOR) posted guidance on a new retail delivery fee that will be imposed on all deliveries by motor vehicles to a Colorado location starting July 1, 2022.3 The retail delivery fee must be collected and remitted by retailers and marketplace facilitators that collect sales and use tax on tangible personal property sold and delivered to purchasers in Colorado. Deliveries include goods that are mailed, shipped or otherwise delivered by motor vehicles. (The CO DOR in FAQs said that the retailer must consider all modes of transportation used to make the delivery from the time the order is accepted until the item is delivered.) The retail delivery fee is due at the same time as the sales tax return, and will be reported and paid on new return DR 1786. The CO DOR's guidance lists the different fees that make-up the $0.27 retail delivery fee, which must be included on the receipt or invoice. If the entire retail sale is exempt from sales and use tax, the delivery is exempt from the retail delivery fee. Lastly, each sale for delivery is considered a single retail delivery, regardless of the number of shipments required to deliver all the goods purchased. The guidance also includes responses to FAQs, including that the retail delivery fee applies when at least one of the purchased items is taxable and is due even when shipping is free. Additional information is available on the CO DOR's Retail Delivery Fee webpage.
Georgia: New law (2022 GA HB 1291) extends the current sales and use tax exemption for the sale or lease of computer equipment to be incorporated into a high-technology company's facility through Dec. 31, 2023 (from June 30, 2023). The exemption with added limitations is effective Jan. 1, 2024 through Dec. 31, 2028. The modified exemption is limited to those purchases or leases made by the high-technology company for calendar years in which the company purchased or leased at least $15 million worth of such computer equipment. Notwithstanding this limitation to the contrary, on or after Jan. 1, 2024, the allowed exemption is limited so that each person claiming the exemption is subject to paying 10% of all sales and use tax on the first $15 million of its eligible purchases or leases for which the exemption is claimed. Further, the definition of "computer equipment" is amended to make clear that such term does not include computers or devices issued to employees (e.g., smartphones, tablets, wearables, personal computers, laptops) or prewritten computer software. In addition, the sales and use tax exemption for high-technology data center equipment to be incorporated or used in high-technology data centers that meets specific investment thresholds and other conditions is extended through Dec. 31, 2031 (from Dec. 31, 2028). The law changes the job creation requirements to qualify for this exemption. 2022 GA HB 1291 took immediate effect. Ga. Laws 2022, Act 842 (2022 GA HB 1291), signed by the governor on May 9, 2022.
Puerto Rico: The Puerto Rico sales and use tax (SUT) holiday for hurricane-season purchases, enacted by 2022 P.R. Laws Act 20-2022, will take place from June 17, 2022 to June 19, 2022. The SUT holiday was originally scheduled for the last weekend in May. Because merchants were concerned that they would not be able to obtain enough inventory in time for the SUT holiday, the Puerto Rican Treasury Secretary exercised his discretion for this first year of the statute's implementation and postponed the holiday to the weekend of June 17, 2022. For additional information on this development, see Tax Alert 2022-0847.
Tennessee: New law (2022 TN HB 2378) exempts from sales and use tax the fabrication, installation and repair of computer software by a person (including the person's agent or direct employee4), for the person's own use and consumption. The law also exempts from sales and use tax the access and use of software that remains in the possession of the dealer (or in the possession of a third party on behalf of the dealer) who provides the software (or in the possession of a third party on behalf of the dealer) where the software is accessed and used solely by the person (or person's agent or direct employee) for the exclusive purposes of fabricating other software that is (1) owned by that person and (2) is for that person's own use and consumption. These provisions take effect July 1, 2022. 2022 Tenn. Pub. Cats, ch. 1065, 2022 TN HB 2378, signed by the governor on May 25, 2022.
Georgia: New law (2022 GA HB 469) extends the sunset date of the state's historic property rehabilitation tax credit through 2027 (from 2022); no new credits will be issued on and after Jan. 1, 2028. The law also caps the aggregate amount of credit for historic homes at $5 million per year for calendar years 2023 and 2024. On and after Jan. 1, 2025, no credits will be issued for historic homes. For calendar years 2023 through 2027, the aggregate amount of credits issued for certified structures other than historic homes is capped at $30 million per year. Ga. Laws 2022, Act 812 (2022 GA HB 469), signed by the governor on May 2, 2022.
Kansas: New law (2022 KS HB 2703) establishes the Kansas Targeted Employment Act, which provides a tax credit to "targeted employment businesses"5 (or a taxpayer outsourcing work to a targeted employment business) that employ individuals with developmental disabilities. The credit is available for tax years 2022 through 2027; can be claimed against the income, privilege or premium tax liability of the taxpayer qualifying as a "targeted employment business"; and only applies to wages for hours worked and not for any compensation for paid leave. The credit equals 50% of the wages paid to an eligible individual on an hourly basis, up to a maximum credit of $7.50 per hour. For purposes of calculating the credit, the wage rate used cannot be more than a reasonable or usual and customary market wage rate for a similar job. The credit is nonrefundable and unused amounts cannot be carried forward. The maximum amount of credit allowed per year is $5 million. The Kansas Secretary of Revenue and the Kansas Secretary for Aging and Disability are authorized to adopt rules and regulations to administer the credit. 2022 KS HB 2703 takes effect July 1, 2022. 2022 Kan. Sess. Laws 2022, ch. 70 (2022 KS HB 2703), signed by the governor on April 18, 2022.
Maryland: New law (2022 MD SB 391) modifies the More Jobs for Maryland program and changes the eligibility requirements effective June 1, 2022. Changes to the definition of "qualified position" increase salary requirements. As revised by the new law, a qualified position is one that is full-time or of indefinite duration at a facility in an opportunity zone and pays an average annual salary that exceeds $50,000 or at least 150% of the state minimum wage (from 120% of the state minimum wage). A business entity can apply to enroll an eligible project in the program if the business entity intends to create at least 10 qualified positions at the project in a Tier I area (from five positions) or 20 qualified positions if the project is located in a Tier II area (from 10 positions). A qualified business entity located in a Tier II area can claim the program benefits for up to five years (down from 10 years). The Maryland Department of Commerce may not provide a qualified business entity a certificate of eligibility to enroll in the program on or after June 1, 2024. In addition, for qualified business entities that receive such a certificate on or after June 1, 2022, the amount of credit authorized under the program is reduced to 4.75% (from 5.75%). Also as of June 1, 2022, the aggregate amount of tax credits that can be issued is reduced to $5 million (from $9 million) in a fiscal year. The new law also adds that the purpose of the program is to provide incentives for the creation of new manufacturing jobs in Maryland and to attract new businesses to, and encourage expansion of, existing businesses within opportunity zones. Md. Laws 2022, ch. 136 (2022 MD SB 391), signed by the governor on April 21, 2022.
Arizona: New law (2022 AZ SB 1579)provides for the annual central assessment of all property owned or leased and used by a taxpayer in the operation of an electric transmission or distribution system or an energy storage system. Ariz. Laws 2022, ch. 235 (2022 AZ SB 1579), signed by the governor on May 20, 2022.
South Carolina: New law (2022 SC HB 5144) clarifies the exemption from property taxation for property used in providing telephone service applies to all property used to provide such services regardless of the technology used. Specifically, the new law provides that property qualifying for the exemption includes property used to provide telephone service in rural areas, including mixed-use property, without regard to (1) the extent to which the property is used in providing services in addition to telephone services in a rural area; and (2) the technology used, including the provision of broadband over a high-speed Internet connection, allows customers to access basic voice grade local service from the customer's chosen provider. This change took immediate effect and applies to property tax years beginning after 2021. S.C. Laws 2022, Act 203 (2022 SC HB 5144), signed by the governor on May 16, 2022.
COMPLIANCE & REPORTING
New Mexico: The New Mexico Taxation and Revenue Department (NM TRD) issued guidance on estimated tax payments for pass-through entities (PTEs) making an election to be taxed at the entity level (PTE tax). The NM TRD explained that withholding payments made by a PTE are considered estimated payments for the PTE tax, and that the due date for making estimated PTE tax payments are the same as the due date for PTE withholding payments under NMSA §7-3A-3(B). Currently, withholding payments are made annually. Thus, an electing PTE is not required to make separate quarterly estimated PTE tax payments; rather, the electing PTE is only required to submit an annual PTE withholding payment. PTE withholding payments are reported on RPD-41367, Pass-Through Entity Withholding Detail Report PTW-D. N.M. Taxn. and Rev., Bulletin B-300.23 "Estimated Payments for Pass-Through Entities" (May 2022).
Maryland: New law (2022 MD SB 477) establishes a Legal Division in the Office of the Maryland Comptroller to provide guidance to taxpayers and issue private letter rulings. A request for a private letter ruling must include a statement as to whether the person requesting it is subject to an ongoing tax matter such as an audit, a refund claim, a tax protest, or an appeal to the tax court or any other court with jurisdiction. If the person is subject to an ongoing matter, the relevant case numbers or other identifying information must be included in the statement. The Maryland Comptroller can request additional information from the person; such information must be submitted within 30 days. A private letter ruling request may be denied by the Maryland Comptroller for good cause. Examples of "good cause" include the issue is the subject of existing guidance to the taxpayer; additional information was not timely submitted; the issue is subject to extensive study or review or currently being considered in a rulemaking procedure or a contested case; the transaction for which the ruling is requested is designed for tax avoidance; the request is to determine the constitutionality of a statute; the request is overbroad or unclear; the issue is adequately addressed by statute, regulation or case law; the issue involves the tax consequences of proposed federal, state or local legislation; or the issue involves a hypothetical situation or alternative plans. The person may withdraw a private ruling request. Private letter rulings are binding on the Maryland Comptroller for seven years, unless certain conditions are met, such as a change in law, the ruling is revoked, or a misstatement or omission or material facts was made in the ruling request. The modification or revocation of a private letter ruling may not be applied retroactively. The Maryland Comptroller must periodically publish redacted rulings on its website, and it must adopt regulations to implement these provisions. The new law takes effect July 1, 2022. Md. Laws 2022, ch. 481 (2022 MD SB 477), signed by the governor on May 16, 2022.
PAYROLL & EMPLOYMENT TAX
Arizona: As a result of the approval of Proposition 206 by Tucson voters, effective April 1, 2022, the new Tucson Minimum Wage Act (TMWA) increases the city's minimum wage and imposes other requirements affecting how employees in the city of Tucson are paid. For instance, employers are prohibited from paying employees with a pay card, reloadable debit card or similar payment method that requires the employee to have a valid Social Security number and employers are prohibited from taking deductions from wages if doing so will result in the employee's receiving less than the city's minimum wage. For more on this development, see Tax Alert 2022-0848.
Maryland: In March 2022, the Maryland Comptroller issued an update to its Maryland Employer Withholding Guide to reflect changes in the standard deduction rates enacted in 2018. The updated guide shows changes in the percentage method of income tax withholding, now reflecting a minimum standard deduction of $1,600 and a maximum standard deduction of $2,400. No change was made to the state income tax rate of 3.2%. For additional information on this development, see Tax Alert 2022-0786.
Utah: The Utah Tax Commission has updated its Withholding Tax Guide to reflect revised income tax withholding tables that apply for payroll periods beginning on and after May 1, 2022. The revisions to the withholding tax tables reflect legislation enacted earlier in 2022 that lowered the state's personal income tax rate. For additional information on this development, see Tax Alert 2022-0793.
VALUE ADDED TAX
International — Norway: The Norwegian Ministry of Finance has proposed to extend the scope of services subject to Norwegian value-added tax (VAT) supplied by foreign service providers to cover the supply of intangible and remotely delivered services to Norwegian consumers (VAT on e-commerce or VOEC). For additional information on this development, see Tax Alert 2022-0845.
Tuesday, June 7, 2022. Are you ready for July 1? — Top five questions companies ask about Superfund tax implementation and selected issues (1 - 2 pm EDT). Please join EY's cross-functional panel of professionals for a webcast on the questions most commonly asked by companies preparing for the July 1, 2022 implementation for the reinstated federal Superfund chemicals excise taxes enacted as part of the Infrastructure Investment and Jobs Act (P.L. 117-58) (IIJA). During the webcast, our EY panel will focus on some of the key considerations that companies should analyze in order to determine the potential impact of Superfund excise taxes on their businesses. The panel will also share insights into what businesses may need to consider as they evaluate the readiness of their existing compliance systems and processes to comply with the reporting and payment requirements for the Superfund taxes. Register.
Thursday, June 9, 2022. The indirect tax technology journey: Now. Next. Beyond. (1 - 2 pm EDT). Join our EY team of tax technology professionals for the fifth in a series of webcasts focused on the evolving technology landscape. During this 60-minute webcast, the final one in this series, our EY panel will share insights into how market-leading organizations are using technology to adapt to new legislation and market trends and to effectively transform tax operations. This webcast will focus on leading practices for global indirect tax technology selection and implementation. Because technology is a vital component for every business looking to build a resilient, future-ready tax function, these webcasts are relevant across all sectors and to businesses of every size. Register.
Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.
2 The Colorado PTE tax election is available to both partnerships and S corporations (including a limited liability company treated as either a partnership or an S corporation).
3 The retail delivery fee was established by 2022 CO SB 21-260 as part of a transportation system sustainability bill.
4For purposes of this provision under Tennessee law, a "direct employee" is "an employee to whom the person is obligated to issue a federal form W-2, wage and tax statement, and with respect to whom the person has responsibility for withholding taxes under the Federal Insurance Contributions Act (26 U.S.C. §§ 3101—3126), or such other entity or affiliate that upon petition to the [Tennessee] commissioner [of revenue] has been approved as having that responsibility under this section."
5 Under the new Kansas law, a "targeted employment business" is defined as an "employer employing eligible individuals in competitive integrated employment in a competitive integrated setting and who are authorized to do business in Kansas"; but does not include a community service provider. To qualify as a "targeted employment business", "the employer must pay earned income to an eligible individual in a calendar year."